Sarepta Therapeutics (NASDAQ: SRPT) stock ended last week up over 11% due to the better-than-expected first-quarter sales of its Duchenne muscular dystrophy (DMD) drugExondys 51, combined with the rumor that the French drugmaker Sanofi (NYSE: SNY) may be considering a tender offer in the not-so-distant future.
Although this buyout rumor is based solely on the news that Sarepta'sCEO Ed Kaye is stepping down and Sanofi'sexecutive Jean-Paul Kress also decided to leave Sarepta's board of directors due to "a possible conflict of interest associated with his future endeavors," it wouldn't be entirely surprising if Sarepta were making the rounds as a takeover target at this juncture.
Orphan drugmakers with FDA approved products are arguably the most highly coveted types of companies in the space -- especially ones like Sarepta that sport products with no direct competitors on the market.
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As biotech buyout scenarios can generate eye-popping returns for investors in the blink of an eye, I think it's definitely worth considering how much Sarepta could potentially fetch if Sanofi, or perhaps another big pharma, came calling. So, with this theme in mind, let's consider some possible price tags for this rare disease drugmaker.
Guesstimating Sarepta's price tag
The first issue to understand is that Exondys 51 is pretty much the only available treatment for DMD -- perhaps giving Sarepta a sizable amount of leverage at the negotiating table.
BioMarin's rival DMD drug, drisapersen, was rejected by the FDA, causing the drugmaker to abandon its entire DMD pipeline. The only other noteworthy late-stage DMD drug in development is PTC Therapeutics' Translarna -- a drug that targets a different set of patients than Exondys 51 and that has had an extremely rough time getting past regulatory authorities in the United States.
With the competitive threats from BioMarin and PTC Therapeutics off the table and only a handful of other DMD drugs even in development, Sarepta is arguably in a fairly strong negotiating position at this point.
The one potential "glitch" -- and it's a significant one -- is that Exondys 51 could one day be pulled from the market if itspost-approval studies fail to prove its effectiveness. The drug was initially approved basedon a rather limited amount of data that failed to establish its efficacy. Potential suitors would undoubtedly use this risk factor as a bargaining chip in a buyout negotiation.
Getting down to brass tacks, Sarepta's entire portfolio of exon-skipping DMD drugs -- which were validated to a large degree by Exondys 51's approval -- are expected to represent a $1 billion-plus peak sales opportunity. As orphan drugmakers have tended to a fetch a premium in the range of three to five times peak sales estimates, I think Sarepta's asking price is somewhere in the $3 to $5 billion range.
Now, if we take the bearish estimate of the value range reflecting the risk emanating from Exondys 51's conditional approval, Sarepta's price tag should end up being around $3 billion, representing a 50% premium compared to where the stock is trading now. That equates to a tender offer of about $54 per share, which isn't that far off the Street's current 12-month price target of $60.
Sarepta's present valuation of around $2 billion assumes that Exondys 51's commercial launch will go more or less as planned; the drug won't have a clinical setback that'll force the FDA to retract its approval; and the company's remaining DMD pipeline will bear fruit. That's a lot of assumptions, quite frankly, and things rarely, if ever, go that smoothly in the crazy world of biotech.
The point is that if Sarepta does have a deal in the works with Sanofi -- even if it's on the lower end of the valuation range ($3 billionish) -- current shareholders should probably welcome the chance to cash out in light of these significant risk factors.
As for investors eyeing this biotech stock for a quick buck on the back of a buyout, I personally think it might be best to tap the breaks on that idea. While a buyout is certainly a real possibility in this case, Sarepta may struggle to push much higher in the near-term, and it may give back a nice chunk of its recent gains if a buyout fails to materialize. This stock, after all, is presently trading at a rather unsightly price to sales ratio of 91, perhaps implying that a buyout is already at least partly baked into its valuation.
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